Assessments, Withholding, Etc.

TIME.

Assessment of tax for 1913, in May 1915, was in time if the taxpayer's return was "false," which evidently does not mean "fraudulent, but merely untrue or incorrect. (Woods v. Lewellyn, 252 Fed. 106, 1918.)

WITHHOLDING.

The provisions for collecting income at the source do not deny due process of law by reason of duties imposed upon corporations without compensation in connection with the payment of the tax by others. (Brushaber v. Union Pacific Ry. Co. 240 U. S. 1, 1916, followed in Dodge v. Osborn, 240 U. S. 118, 1916.)

PARAGRAPH G (a).

G. (a) That the normal tax herein before imposed upon individuals likewise shall be levied, assessed, and paid annually upon the entire net income arising or accruing from all sources during the preceding calendar year to every corporation, joint-stock company or association, and every insurance company, organized in the United States, no matter how created or organized, not including partnerships; but if organized, authorized, or existing under the laws of any foreign country, then upon the amount of net income accruing from business transacted and capital invested within the United States during such year: Provided, however, That nothing in this section shall apply to labor. agricultural, or horticultural organizations or to mutual savings banks not having a capital stock represented by shares, or to fraternal beneficiary societies, orders, or associations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and providing for the payment of life, sick, accident, and other benefits to the members of such societies, orders, or associations and dependents of such members, nor to domestic building and loan associations, nor to cemetery companies, organized and operated exclusively for the mutual benefit of their members, nor to any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual, nor to business leagues, nor to chambers of commerce or boards of trade. not organized for profit or no part of the net income of which inures to the benefit of the private stockholder or individual; nor to any civic league or organization not organized for profit, but operated exclusively for the promotion of social welfare: Provided further, That there shall not be taxed under this section any income derived from any public utility or from the exercise of any essential governmental function accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State, Territory, or the District of Columbia, nor any income accruing to the government of the Philippine Islands or Porto Rico, or of any political subdivision of the Philippine Islands or Porto Rico: Provided, That whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, has, prior to the passage of this act, entered in good faith into a contract with any person or corporation, the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this act upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, or the District of Columbia, or a political subdivision of a State or Territory; but this provision is not intended to confer upon such person or corporation any financial gain or exemption

or to relieve such person or corporation from the payment of a tax as provided for in this section upon the part or portion of the said income to which such person or corporation shall be entitled under such contract.

Tax on Corporations.

FOREIGN CORPORATIONS.

Where a Canadian corporation, making newspaper paper, sent agents into the United States to solicit purchasers for its product, paying their expenses, hiring desk room in the United States, empowering the salesmen to make written contracts, in part in the United States, subject to the corporation's approval in Canada, and, when approved, to deliver the contracts, paying rent, storage charges on paper shipped into the United States, and also for work done by checks drawn on a bank in the United States where the company kept its funds received for goods delivered in the United States to purchasers, and then, to perform its written contracts, shipped paper consigned to itself in the United States to different points, where it hired storage rooms, and had the paper delivered to itself at such rooms, where it stored it in its own name and at its own risk pending delivery, doing so for its own convenience and to insure delivery according to contract, also shipping into the United States and storing in such manner paper to meet anticipated demands, such Canadian company "did business" in the United States, "and engaged in business" therein, and also "transacted business" in the United States, so that it was liable to taxation under both acts. (Laurentide Co. Limited, v. Durey, 231 Fed. 223, 1916.)

LEASED CORPORATIONS.

A corporation is liable under section 2, G (a), imposing taxes on corporate income arising or accruing from all sources even though it was not engaged in business and derived all its income as rent from its property. (239 Fed. 739, Rensselaer & S. R. Co. v. Irwin, Aff. in 249 Fed. 726, 1918.)

A railroad company, although not engaged in business, but which has leased all of its property for a long term or for the life of its franchise, the rental to be paid by the lessee as interest on its bonds and a fixed dividend on its stock, direct to the bondholders and stockholders is subject to tax on such rental under this act, the mode of payment provided in the lease being merely for a convenience in distributing the rental. (Northern R. R. Co. of New Jersey v. Lowe, 250 Fed. 856, following Rensselaer & S. R. Co. v. Irwin, 249 Fed. 726.) A lessor street railway corporation is subject to tax on payments made by lessee to stockholders of the lessor under a contract provision in the lease. (West End St. Ry. Co. v. Malley, 246 Fed. 625,

RECEIVERS.

Receivers of insolvent corporations were not taxable prior to the act of September 8, 1916. (Scott v. Western Pacific R. R. Co., 246 Fed. 545.)

Receivers are not subject to tax under the 1913 act on net earnings of an insolvent railroad operated by them. (Equitable Trust Co. of N. Y. v. Western Pac. Ry. Co., 236 Fed. 813, 1916, following Penn. Steel Co. v. N. Y. C. Ry. Co., 198 Fed. 775; decided under 1909 act.)

JOINT-STOCK ASSOCIATIONS.

Where trustees hold shares of stock of a corporation and real estate subject to lease, collecting the dividends and rents, but otherwise doing no business, and distribute the income less taxes and similar expenses to the holders of their receipt certificates, who have no control except the right of filling a vacancy among the trustees and of consenting to a modification of the terms of the trust, upon the special fact under the act of October 3, 1913, the trust is not subject to the income tax as a joint-stock association, and the trustees and the cestui que trust are to be treated as fiduciaries and beneficiaries for purposes of taxation. (Crocker v. Malley, 249 U. S. 223, reversing 250 Fed. 817, 1919.) This case distinguished in Malley v. Bowditch (259 Fed. 809, 1919.)

See case of Haiku Sugar Co. v. Johnstone, 249 Fed. 103, 1918. Under Partnerships (case 2) this section.

PARTNERSHIPS.

"Partnerships are expressly excluded from section G, *

* *

*

If Congress had intended that partnerships, as such, should be taxable upon their net income, the logical place to have so provided would have been in section G, and to have excluded from the net. income of a natural taxable person, subject to the normal tax, that part of his income derived from a partnership, just as is provided with respect to his income derived from a corporation. The Congress consequently, it would seem, ignored, for taxing purposes, a partnership's existence, and placed the individual partner's share in its gains and profits on the same footing as if his income had been received directly by him without the intervention of a partnership name." (U. S. v. Coulby, 251 Fed. 982, affirmed in 258 Fed. 27, 1919.)

Under Session Laws, Hawaii, 1903, act 51, section 1, permitting any two or more corporations organized under the laws of Hawaii to enter into partnership with each other for the transaction of any lawful business, several corporations, by an agreement dated October 30, 1903, formed a partnership, the by-laws of which provided for management by representatives selected by the several partners, who were to represent the partners according to their respective interests. There were no special partners, and there was no partner

ship capital stock. Held, That as the partnership was lawful under the laws of Hawaii, it could not be treated as a joint-stock company, and so subject to taxation under this act. (Haiku Sugar Co. et al. v. Johnstone, 249 Fed. 103, 1918.)

The changeability of membership or transferability of shares is often used as a determining criterion between ordinary partnerships and joint-stock companies. In a joint-stock company, the members have no right to decide what new members shall be admitted; on the other hand, the right of delectus personarum is an inherent quality of an ordinary partnership.

A joint-stock company usually consists of a large number of persons between whom there is no special relation of confidence and the retirement or death of a member works no dissolution, while a partnership, though it may consist of several, is ordinarily made up of members who are drawn to each other by feelings of mutual confidence and no member is at liberty to retire and substitute another. In a joint-stock company a shareholder has no power to contract for the company, whereas a partner may bind a partnership though the partnership is composed of corporations. (Haiku Sugar Co. v. Johnstone, 249 Fed. 103, 1918.)

"ACCRUING" OF INCOME.

An annual dividend received by a corporation on the stock of another corporation is subject to the tax imposed by this section, for the calendar year in which it was declared and paid, as income "accruing" during such year, although half of the profits out of which the dividend was paid accrued prior to the passage of the act. (Skinner v. Union Pacific Coal Co., 249 Fed. 152, 1918; petition for certiorari granted, 247 U. S. 511, pending in the U. S. Supreme Court.)

MINING CORPORATIONS.

The tax on the product of a mine is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations. (Stanton v. Baltic Mining Co., 240 U. S. 103, 1916.)

HOLDING COMPANIES.

A corporation, which merely held the stock of other corporations and, by issuance of proxies to vote at the meetings of the subsidiary companies, directed such corporations, is not exercising any franchise on which excise taxes may be assessed, under income-tax act 1913, for the months of January and February of that year, prior to the ratification of the income-tax amendment to the Constitution of the United States; this being so, though the holding corporation made a loan to its subsidiary company. (Butterick Co. v. United States, and Federal Pub. Co. v. Same, 240 Fed. 539, 1917; dismissed on motion of U. S., 248 U. S., 587.)

EXCISE TAX FOR JANUARY AND FEBRUARY, 1913.

The proviso in section 4-S was intended to relate only to rights and liabilities in respect to taxes which had accrued under the act of 1909, and was not intended to cover excise taxes upon corporations for the months of January and February, 1913, which were imposed by the income-tax act, as the constitutional amendment of March 1, 1913, designed to permit taxation of income without apportionment was not adopted until March 1, this being apparent from the provision that the excise tax for these two months shall be ascertained in accordance with the provisions of section G. Consequently, exemptions in the corporation excise tax act are not applicable to taxes imposed for these two months. (Butterick Co. v. United States, and Federal Pub. Co. v. Same, 240 Fed. 539, 1917; dismissed on motion of U. S., 248 U. S., 587.)

PARAGRAPH G (b).

(b) Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, joint-stock company or association, or insurance company, received within the year from all sources, (first) all the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, including rentals or other payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation by use, wear, and tear of property, if any; and in the case of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made; and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided, That mutual fire insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided further, That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof and life insurance companies shall not include as income in any year such portion of any actual premium received trom any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; (third) the amount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding one-half of the sum of its interest bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of its indebtedness not exceeding the amount of capital employed in the business at the close of the year: Provided, That in case of indebtedness wholly secured by collateral the subject of sale in ordinary business of such corporation, joint-stock company, or association, the total interest secured and paid by such company, corporation, or association within the year on any such indebtedness may be deducted as a part of